The Home-mortgage Search Can Be A Shopper's Nightmare

May 11, 1985|By Steven W. Syre, United Press International

The good old days of buying a mortgage were more than cheaper -- they were a lot less complicated.

The times when shopping for a mortgage simply meant looking for the lowest rates are long gone. Now the home buyer has to consider adjustable rates, caps, indexes, teases, points, APRs, margins, buydowns, short or long terms, and -- heaven forbid -- the possibility of something called negative amortization.

That's only part of it. There's more.

A decision between two kinds of mortgages may not come down to which is a better deal, but to finding the one whose terms make it possible for you to be approved.

A bank will offer several kinds of mortgages with variations available on each. It can get complicated.

''I've found the most knowledgeable individuals need to be told about a product at least three times before he understands what you're talking about. The average person may not be as knowledgeable about figures,'' said Helen O'Donnell, vice president of residential mortgages at Fleet Financial Group in Providence, R.I.

Fixed-rate 30-year mortgages were recently hovering around 13 percent, give or take a half percent. Adjustable-rate mortgages, or ARMs, for 30 years were around 10 percent, some a little lower.

Fixed-rate mortgages may vary by the amount of fees charged or some special incentives -- making it difficult to figure out what the best deal is over the long run.

That's one thing the buyer doesn't have to worry about. The lender is required to disclose the annual percentage rate, the effective rate of the mortage with all the complications considered.

Fees are figured in points, one point equaling 1 percent of the loan amount.

Choosing an ARM involves the obvious risk of higher interest rates in the future, but also the quality of some hedges against that possibility built into a mortgage.

''The customer can't just shop for a rate,'' said John Battaglia of the Boston Five Savings Bank. ''They have to see what the caps are, and what the margin is.''

Adjustable-mortgage rates are all based on some kind of index and interest rates are adjusted according to it, usually every six months or year, sometimes every three years.

Caps limit how much the interest rate can change in any given period, and the highest rate the homeowner will ever have to pay through the life of the mortgage. The most common caps on a 30-year ARM adjusted annually are 2 percent a year and 5 percent for the entire loan.

The lender also builds in a profit margin to the ARM that takes effect at the time of the first adjustment, as much as 2.5 percent. If the mortgage (2 percent cap) is taken out at 10 percent interest and the index goes down 1 percent at the end of the first adjustment period, the interest rate still goes up to 11.5 percent.

Some mortgages cap payment increases but allow the interest rate to fluctuate. If the rate goes higher than the payments, the difference is added to the balance, an effect known as negative amortization.

The choice of a mortgage may also have a lot to do with what is available to an individual homeowner. Banks use a variety of criteria to decide whether a borrower should be approved -- but a couple of general guidelines play a big part.

Typically, lenders don't want the homeowner's principal, interest and tax payments to exceed 28 percent of gross income. They don't want those payments plus all other outstanding debt to be more than about 36 percent of gross earnings.

If the higher interest rate of a fixed mortgage makes those figures just slightly out of reach, the same applicant might qualify for a variable loan.

If the applicant has some cash but not a high enough salary, a buydown might help.

A homeowner who uses a buydown literally buys the opportunity to lower the interest rate for a period of time at the beginning of the mortgage. A one- year buydown lowers the interest rate for the first year, probably by 1 percent, for a certain sum of money.

A buydown can cut the interest rate 1 percent for a year, at a cost of one point up front. A 1 percent buydown on a $100,000 mortgage at 13.25 percent would cut montly payments by $78 -- a savings of $936 over the year that costs $1,000.

Then there's the question of down payments and length of the mortgage. Homeowners who want to build equity faster and can afford higher monthly payments may choose a 15-year term, but the vast majority take the 30-year route.

Downpayments can vary, sometimes down to 5 percent. The best deal is available to veterans, who may be able to get a Veterans Administration-backed mortgage without putting a penny down.

Homeowners who borrowed at an interest rate higher than the current market may want to refinance the mortgage -- under the right personal circumstances. Refinancing involves initial charges just like the original mortgage and, assuming the rate is about 2 percent better, it may take a couple of years to make up the difference. If the homeowner is planning on selling in the near future, the lower interest rate may not be worthwhile.

''Refinancing is like a whole new transaction,'' Battaglia said. ''There are some costs involved. My suggestion is always go the bank that you have your mortgage with first because you can get a deal sometimes.''